January is written in the books – in red ink. The S&P 500 index closed down nearly 3.5% for January, giving back some of the 30%-plus gains of 2013. I keep hearing, “when the market is down in January, the market has about a 70% chance of being down for the entire year.” I’ve heard it for years, but never saw any supporting data backing up the claim.
Since it looked like January was going to close down, I thought I’d crunch some numbers. I took monthly S&P 500 index returns going back to 1926. Out of nearly 90 years of data, there were a total of 31 down Januarys – about a third. Considering only the negative January months, 17 of them lead to years with a negative return, but 14 of them managed to post a positive return for the whole year. I don’t consider approximately 50% odds to be strong enough statistically to base a long-term investment decision on. Plus, 31 data points is just not enough to produce a statistically significant outcome.
So yes, there were some bad years that followed bad Januarys. But there were also some goods ones, such as 1928, 1935, 1982, 2003, and 2010 which were up 38%, 41%, 22%, 29% and 15% respectively. So when you hear that 2014 will be negative for the market because of January’s performance, use caution when translating it to your portfolio shifts.
Source: Bloomberg, Standard & Poors, Union Investment Management Group